Kuwait: Kuwait economic conditions are expected to remain positive over the forecast period, with consumer activity constructive, government fiscal policy expansionary amid elevated oil prices and inflation easing. GDP growth will also be boosted in 2024 from additional crude supply following the unwinding of voluntary OPEC+ production cuts. The challenge remains to extend near-term gains into sustainable, long-term improvements to the public finances and economic diversification. Amid a greater sense of political urgency, prospects for progressing key reform steps appear stronger than in previous years

GDP growth should turn negative in 2023 (-0.7 percent) on the back of Kuwait’s commitment in April 2023 to additional OPEC+ voluntary oil production cuts, which will cut full-year output by 4.3 percent to an average of 2.6 mb/d. These cuts are scheduled to be unwound in 2024, which should drive both oil sector and total GDP up 3.3 percent next year. Higher crude flows will also facilitate further refining sector value-add (classified as non-oil activity), with the newly-commissioned 615 kb/d Al-Zour refinery steadily ramping up gasoil and fuel oil output in a key recent megaproject success story.

Non-oil growth normalizes

Growth in the non-oil economy (ex-refining), meanwhile, has been solid, at a forecast of 3.0 percent in 2023 (down from an estimated 3.2 percent in 2022) on the back of buoyant private and expanding government consumption, supported by elevated oil prices. With the exception of project awards and refining sector output, both of which ranged higher in 2023—the former at more than twice 2022’s full year levels—key indicators of non-oil activity, such as consumer cards spending (+8.7 percent y/y in Q3), real estate sales (-18.2 percent y/y as of Sept) and household credit (+2.6 percent y/y as of Sept), have been trending downwards in annual growth terms since peaking in 2022. This has taken place amid tighter monetary conditions and softer global economic growth. Looking ahead, we expect non-oil GDP to grow at a similar rate in 2024 on broadly constructive consumer spending, an uptick in household lending growth and still high oil prices. The economy may also benefit from continuing post-pandemic expatriate inflows (employment up 14 percent y/y to 2.5 million as of mid-2023) to ease labor shortages and drive projects activity.

Inflation likely to ease in 2024

Inflation ranged at around 3.7 percent for most of 2023 (core rate at 3.2 percent), likely reflecting a combination of ongoing strength in consumer demand, rising housing rents and lingering supply chain issues. These dynamics are expected to lessen in 2024, helping to bring inflation down to 2.5 percent on average. Meanwhile, with the US Fed likely to cut interest rates before end-2024, the Central Bank of Kuwait may follow suit – although having hiked its discount rate only about half as much as the Fed since March 2022 (+275 bps to 4.25 percent), it may opt to cut by less on the way down.

Budget deficits through 2024

The public finances have improved amid higher oil prices and generally keener spending oversight. That said, the FY22/23 surplus of 11.8 percent of GDP, Kuwait’s first since 2014, is expected to revert to a deficit of 3.6 percent of GDP (KD 1.83 billion) in FY23/24 given the record spending penciled in the budget. This included large, non-recurring outlays on fuel subsidies and employee leave payments. Our deficit estimate is much narrower than the budget’s forecast of 6.2 percent of GDP, given the historical tendency for spending to undershoot the budget and conservative official oil revenue assumptions. Next year, the deficit should narrow to 1.2 percent of GDP on a moderate spending increase (+4 percent from FY23/24 excluding one-off items) and still-high oil prices. Capex should see another year of double-digit gains as development projects are prioritized.

Outlook positive

Overall near-term economic prospects are favorable, with private consumption solid, inflation trending lower and fiscal and external buffers ample (CBK reserve and KIA overseas assets are in excess of $850 billion, or 521 percent of GDP). Public debt (3.0 percent of GDP) is also extremely low by international standards. Nevertheless, the economy remains exposed to oil price volatility, uncertain OPEC+ oil production policy and disruptive domestic politics. Here fiscal sustainability and economic diversification goals have often run up against populist calls for greater welfare spending and policymaking inertia, respectively.

That said, the new executive and legislature appear to share a greater sense of urgency to address key economic challenges. Priorities in the government’s 4-year economic plan (2023-27) include creating a comprehensive fiscal framework, developing the private sector and improving government efficiency. Corporate and excise taxes may be the first revenue-boosting measures to be rolled out, helping to offset increases in retiree pensions and possibly cost-of-living allowances championed by MPs.

System-wide, supply-side and regulatory reforms (e.g. of business, housing and labor markets) alongside initiatives to boost historically soft investment rates will be essential to realize productivity gains and economic diversification goals. Mooted housing development and mortgage laws plus the potentially sizeable ‘Ciyada’ domestic investment vehicle could be positive initiatives on the horizon.